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Fiscal Policy in Unionized Labor Markets

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  • Ardagna, Silvia
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    Abstract

    This paper investigates the effects of fiscal policy on economic activity, public finances, welfare, and income distribution in a dynamic general equilibrium model with a unionized labor market. The paper shows that debt-financed increases of public employment, wages of public sector employees, unemployment benefits, and labor taxes put pressure on unions’ wage claims, leading to higher private sector wages, lower employment, capital, and output. In addition, increases of public employment, public wages and unemployment benefits increase workers’ utility relative to the pre-policy change equilibrium during the transition, but not in the long-run. Instead, workers’ utility decreases at any time horizon when labor taxes increase. Capitalists always benefit from increases in taxes on labor but their welfare decreases when public spending goes up. Finally, the paper investigates the extent to which the way the government balances its budget affects these results.

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    File URL: http://dash.harvard.edu/bitstream/handle/1/2580048/Ardagna_FiscalPolicy.pdf
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    Bibliographic Info

    Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 2580048.

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    Date of creation: 2007
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    Publication status: Published in Journal of Economic Dynamics and Control
    Handle: RePEc:hrv:faseco:2580048

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    19. C. John McDermott & Robert F. Wescott, 1996. "An Empirical Analysis of Fiscal Adjustments," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 725-753, December.
    20. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 47-104, 04.
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    Cited by:
    1. Gonzalo Fernàndez-de-Córdoba & Javier J. Pérez & José L. Torres, 2009. "Public and private sector wages interactions in a general equilibrium model," Working Paper Series 1099, European Central Bank.
    2. Javier J. Pérez & A. Jesús Sánchez, 2010. "Is there a signalling role for public wages? Evidence for the euro area based on macro data," Working Paper Series 1148, European Central Bank.
    3. Konstantinos Angelopoulos & Wei Jiang & Jim Malley, 2011. "The Distributional Consequences of Tax Reforms under Market Distortions," CESifo Working Paper Series 3600, CESifo Group Munich.
    4. António Afonso & Pedro Gomes, 2008. "Interactions between Private and Public Sector Wages," Working Papers 2008/55, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..
    5. Gonzalo F De córdoba & Javier J Pérez & José L Torres, 2012. "On the substitutability between public and private employment," Economics Bulletin, AccessEcon, vol. 32(3), pages 2700-2709.
    6. Margarita Katsimi & Vassilis Sarantides, 2009. "The Impact of Fiscal Policy on Profits," CESifo Working Paper Series 2849, CESifo Group Munich.
    7. George Economides & Dimitris Papageorgiou & Apostolis Philippopoulos & Vanghelis Vassilatos, 2012. "Smaller Public Sectors in the Euro Area: Aggregate and Distributional Implications," CESifo Working Paper Series 3965, CESifo Group Munich.
    8. Gaetano D’Adamo, 2011. "Wage spillovers across sectors in Eastern Europe," Working Papers 1122, Department of Applied Economics II, Universidad de Valencia.
    9. Marco Battaglini & Stephen Coate, 2011. "Fiscal Policy and Unemployment," NBER Working Papers 17562, National Bureau of Economic Research, Inc.
    10. Carine Bouthevillain & John Caruana & Cristina Checherita & Jorge Cunha & Esther Gordo & Stephan Haroutunian & Amela Hubic & Geert Langenus & Bernhard Manzke & Javier J. Pérez & Pietro Tommasino, 2009. "Pros and Cons of various fiscal measures to stimulate the economy," BCL working papers 40, Central Bank of Luxembourg.
    11. T. Buyse & F. Heylen, 2012. "Leaving the empirical (battle)ground: Output and welfare effects of fiscal consolidation in general equilibrium," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/826, Ghent University, Faculty of Economics and Business Administration.
    12. Neicheva, Maria, 2007. "Non-Keynesian effects of Government Spending: Some implications for the Stability and Growth Pact," MPRA Paper 5277, University Library of Munich, Germany.

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